The Point: When it comes to Mergers & Acquisitions, speeding up isn’t the answer. In fact, I typically see that if those that lead M&A would simply slow down, they actually achieve their objectives more quickly! So how then do Mergers & Acquisitions leaders and their teams slow down for success? In this two-part post (You can read Part 1 by CLICKING HERE), we’ll explore exactly how slowing down to speed up can be achieved in Mergers & Acquisitions… Enjoy!
In Part 1 of this post on “Mergers & Acquisitions: Slowing Down to Speed Up!” we explored how slowing down to speed up can be achieved in Mergers & Acquisitions. Specifically, we reviewed the effect of COVID-19 on M&A, a six (6) stage Mergers & Acquisitions Strategy, and how slowing down to speed up can result in M&A success. Here in Part 2, we will continue the discussion on potential challenges and how to navigate them.
Pricing Flexibility and Fairness
As mentioned in Part 1, a key issue when negotiating an M&A deal is the agreed to pricing mechanism or structure of the deal and related adjustments to be made. Know this: There is almost always a difference between what the Seller believes is the appropriate price and what they Buyer believes they should have to pay for a business. This valuation gap should contain contingency planning on how to deal with differences in lock box (fixed price plus an interest component), working capital, capex, and net debt adjustments and Seller Discretionary Earning – SDE or earnout.
The Breakup Clause or MAC
As a Buyer of businesses, we typically like to include clauses that allow for a clean “breakup” if need be. There’s considerable time and investment made, and nothing is worse than an ugly breakup! Including a Material Adverse Change (MAC) condition whereby “walk-away” privileges are preserved.
Keep in mind that a MAC should be used as a Buyer’s protection tool in the event significant differentiation presents itself in asset deterioration versus stated condition for example. A MAC should not be utilized as a “cool down” or buyer’s remorse prevention tool.
Targeted Due Diligence
The main issues identified for the business should be included in a targeted due diligence approach. This approach could be further supported by identifying and putting into place Representations and a Warranty & Insurance policy. These policies are used in Mergers and Acquisitions to protect against losses arising due to the Seller’s breach of certain representations made in the acquisition agreement.
With so much to consider when it comes to a Mergers and Acquisitions due diligence initiative, where should you start? In other words, if you don’t have a target to aim for, you’ll never know if you hit or miss it! Consider this due diligence moment as one similar to a VC exploring a Series B round investment. Here then is a list of 8 items to target as a part of your due diligence:
- Corporate Records and Charter Documents
- Business Plan and Financials
- Intellectual Property
- Security Issuances and Agreements Concerning Securities
- Material Agreements
- Information Regarding Disputes and Potential Litigation
- Information Regarding Employees and Employee Benefits
- Equity Grants
Competitive Analysis
A competitive analysis is a strategy where you identify major competitors and research their products, sales, and marketing strategies. By doing this, you can create solid business strategies that improve upon competitor’s market position. We recommend conducting a Competitive Analysis as part of your due diligence, primarily because you’ll need to identify the current role the organization plays within the existing business climate, as well as where potential lies.
In conducting a SWOT Analysis (Strengths, Weaknesses, Opportunities, and Threats), we recommend a deep-dive on competitors. You’ll need to identify who you’re really competing with so you can compare data accurately (An apple vs apple comparison, even if it’s two different varieties of apple is better than an apple vs orange comparison). Specifically, you’ll want to identify:
- Who are your direct competitors (Those competitors you that offer a product or service that could pass as a similar substitute for yours, and that operate in your same geographic area).
- Who are your indirect competitors (Those that provide products/services that are not the same as yours, but could satisfy the same customer need or solve the same problem).
Competitor analysis is something that you’ll also want to revise throughout the years of ownership. Why? The market can and will shift anytime, and if you’re not constantly surveying the competitive landscape, you won’t be aware of changes until it’s too late.
SUMMARY
In this post, Mergers & Acquisitions: Slowing Down to Speed Up! Part 2, we explored how slowing down to speed up can be achieved in Mergers & Acquisitions. Specifically, we reviewed Pricing Flexibility and Fairness, The Breakup Clause or MAC, Targeted Due Diligence, and Competitive Analysis.
Sam Palazzolo
